No Magic Wand: Debt Consolidation, Debt Settlement, and Debt Counselors

Millions of Americans are struggling to pay their bills in this very difficult economy. If you are, know that you are not alone. You may find yourself searching for answers to your problem after seeing ads from lenders, debt counselors and debt settlement companies? So which alternative is best? In reality, there is no magic wand that is going to work for everyone in every situation.

Debt Consolidation

This option typically involves a lender who is willing to make you a new loan to pay off several other loans or debts you have. This allows you to consolidate the money you owe into a single payment and perhaps extend the repayment period or lower the interest rate. A carefully crafted debt consolidation loan typically allows you to reduce your payments and to avoid late fees and extra charges. Lenders usually require additional collateral (think car or home) so you may have converted unsecured debt to debt secured by your home or auto and that may pose additional problems if you can’t make your loan payments. The bottom line is that you still end up owing the same amount of money, you just have longer to pay it off and usually at a lower rate.

Debt Settlement

This option involves negotiating with your creditors to reduce the amount you owe, your interest rate, or both. In short, the creditor is going to accept less than what you owe them in hopes of getting at least a portion of that debt paid back. This usually works best if you have a lump sum to offer. You can work with your creditors on your own but if you don’t have a lump sum you are probably going to have to work with an attorney or with a debt settlement company. The pros of a debt settlement is that you can satisfy the debt in full for less than what you owe and you are done with it. The cons are that it will appear on your credit report as a settled debt and you may have to pay taxes on any forgiven debt. You also need to make sure you are dealing with a reputable company so be sure to contact the Better Business Bureau (www.bbb.org or (703) 276.0100) and check them out before you sign anything. Keep in mind that a debt settlement does not provide instant relief, can be expensive, and if you are not careful who you work with, may not be a solution at all and could make things worse… much worse.

Debt Counseling

There are reputable organizations like the Consumer Credit Counseling Service (www.cccs.net or 214-638-2227) that work to provide financial literacy education, help in managing budgets and also can help with a debt management plan that is essentially a debt settlement. Fees with a debt counseling service are usually much lower than a debt settlement company because most are non-profit. In some cases they may waive their fee if you can’t afford to pay anything. Debt counselors work with you to get to the root of the problem, which is often inadequate budgeting skills and insufficient financial information . To find the nearest nonprofit counseling service, contact the National Foundation for Credit Counseling (www.nfcc.org 1-800-388-2227).

There is no magic wand to get you out of debt. The real solution is changing your spending habits. That means reducing your expenses and or increasing your income and getting educated on handling your finances.

Here are a few other tips to help you stay out of trouble: 1) If possible, always pay more than is required. Paying the minimum amount due on a credit card will keep you in debt and making payments for more than 30 years. 2) Don’t be late – if you are, even one time, you may get hit with a high penalty rate. 3) Use debit instead of credit – debit cards draw the money out of your checking account so they don’t allow you to overspend as easily as a credit card does. 4) Make saving a habit. Find a way to start saving something every month. If you can, establish an automatic or direct transfer to savings so you can start to establish a good habit and an emergency fund. 5) Remember, you did not get into debt overnight and you will not get out overnight either – it will take time and hard work!

This information is provided with the understanding that the association is not engaged in rendering specific legal, accounting, or other professional services. If specific expert assistance is required, the services of a competent, professional person should be sought.

Provided as a public service by the Pennsylvania Association of Community Bankers.

Improving Your Credit Score
 

Many Americans are feeling trapped in the current economic climate, facing foreclosure on their homes and living on credit cards to make it from month to month. Now, more than ever, it is important to maintain a high credit score and know what is in your personal credit report.
 

You first need to understand that, under federal law, you are entitled to a free credit report from each of the three national credit reporting companies each year.
To get started, select a date on the calendar. Let's start today. Go to your computer and log on to www.annualcreditreport.com. Be sure to order your report from this website. Other sites will charge you a fee. Using the date you select, you will be able to receive another free report each year by logging on and requesting your credit report. You may also call 877.322.8228 to request the form.
 

While you're checking on your credit report, you will also have an opportunity to check your credit score. This report will cost you a nominal fee, but it is important to know your score. Each year on your selected date, you will be able to order your free credit report and purchase a copy of your credit score.
 

What is a credit score?
The three national credit reporting bureaus, Experian, Equifax and TransUnion keep reports based on information they receive from companies who have extended credit to you. These reports include information such as your payment history, the length of your credit history, and the types of credit you have and the amounts you owe. From that information, they derive your credit score, which can range anywhere from 300 to a perfect 850.

Keep in mind that the higher your score, the better interest rates you'll receive. For example, consumers with a credit score above 700 generally receive lower interest rates and those with a credit score of 760 or higher will receive the lowest interest rates. The median credit score is 723. Consumers with the highest credit scores usually pose a lower risk as a potential borrower. If you're thinking about buying a new car or purchasing a new home, your 3-digit credit score will in large part determine your interest rate.
 

How is your credit score calculated?
According to one financial planning expert, your credit score is calculated using this formula:
- 10% is based on the types of credit in use, including the number of accounts and the mix of those accounts.
- 35% is based on your payment history. Do you pay your bills on time? Do you have any bankruptcies, judgment liens or foreclosures on your record?
- 30% is based on the amounts owed on available credit cards and installment loans.
- 15% is based on the length of your credit history.
- 10% is based on the number of new credit accounts opened recently.
 

How can you improve your credit score?
- Pay your bills on time. If you find it difficult to make time to sit down and pay your bills on a regular basis, consider setting up an automatic payment system through your bank, so you're never late. Of course, be sure you have enough money in your account to avoid overdrafts.
- Be sure you don?t have too much credit. Too many credit cards and installment accounts can negatively affect your credit score.
- Don't max out your credit cards and keep balances on your credit cards low. Experts suggest you keep your debt ratio on your credit cards under 50%. If you have a $5000 limit, don't carry a balance more than $2500.
- Don't open a lot of credit cards you don't need.
- Pay down those credit cards with the highest interest rates first.
- Carefully review your credit report and correct any errors immediately.
 

Credit is a good thing, but we all know what they say about too much of a good thing. Use credit responsibly and you'll find your lender will offer you the lowest interest rate when you go to purchase that new home or automobile.
 

This information is provided with the understanding that the association is not engaged in rendering specific legal, accounting, or other professional services. If specific expert assistance is required, the services of a competent, professional person should be sought.
 

Provided as a public service by the Pennsylvania Association of Community Bankers.
Contact: Pennsylvania Association of Community Bankers 717.231.7447

Online BillPay Will Keep You On Time
 

We've become a nation of time-savers. One of the simplest and most burgeoning time savers is online bill pay. By using online bill pay, we can save time, postage and ensure that our bill payments arrive on time. 
 

Some people are hesitant to use this service because they don't understand how it works, are distrustful of putting financial information on the web or prefer the traditional method of paying bills by writing a check so they can have a paper trail.
 

There are three ways to pay your bills online:
 

First, you may want to check with your community bank or other financial institution to determine whether they offer online bill pay to their customers. Many financial institutions offer online bill pay as a free service to their customers. You simply set up an online account on the bank's secure server, register your bills and schedule payment dates.
 

Secondly, you may want to use a third-party bill pay service to set up accounts for all of your monthly bills. This system works in the same manner. Just be sure the service you select has a safe encrypted Internet site. To ensure that you are not being directed to a fraudulent site, look for an image of a padlock in the lower portion of your computer screen. When you double-click the padlock, you'll be able to read the certification information on the pop-up screen. If there is no padlock image, you need to keep searching for another secure bill pay service.
 

As a third alternative, many companies accept online payments without charging you a fee. Additionally, once you set up an online bill pay account with one of your creditors, the company will send you an e-mail reminder that your bill payment is due and then send you a follow-up e-mail after you confirm your payment.
 

With online bill pay, you can schedule your payment due date and won't have to worry about finding time to sit down and write checks. Should you be on vacation or have an emergency situation, you don't have to worry about paying your bills. With your established due date, the bank online bill pay service will automatically deduct your stated amount from your account. Just be sure that you have enough money in your bank account each month to cover your payments.
 

If you are really serious about getting all of that clutter off your desk, you can also request that your creditor e-mail your statement to you. At the click of a button, you can access all of your account information whenever it is convenient for you. You can review payment history, transactions and recent activity so you will know if someone is using your account without authorization without waiting for a statement in the mail.

Once you see how easy an online bill pay service can be, you'll wonder why it took you so long to get started. Just remember to always use caution any time you transact business via the Internet. Be sure to use a reliable and trusted company with a secure server.
 

This information is provided with the understanding that the association is not engaged in rendering specific legal, accounting, or other professional services. If specific expert assistance is required, the services of a competent, professional person should be sought.
 

Provided as a public service by the Pennsylvania Association of Community Bankers.
Contact: Pennsylvania Association of Community Bankers (717) 231-7447

You're Entitled to a Free Credit Report!!
Thanks to a recent change in federal laws, Americans are now entitled to receive one free copy of their credit report every year from each of the nation's top three credit reporting agencies - Equifax, Experian and TransUnion.

And according to the Federal Trade Commission (FTC), the only website authorized to provide those free reports is www.annualcreditreport.com.

However, there are plenty of companies that charge consumers for access to their credit reports, so the FTC cautions you to type that web address carefully to avoid accidentally ending up on a site that charges a fee for a service you're entitled to receive for free.